🎰Introduction to Perpetual Futures

Most of the guide here is taken from internet. Options are not gambling they

Options

Before knowing what perpetual are you must know what are options specifically futures.

Yup it is trust me

Here is what investopedia says!

The term option refers to a financial instrument that is based on the value of underlying securities, such as stocks, indexes, and exchange-traded funds (ETFs). An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they decide against it.

So basically an options contract basically gives you the power of holding an asset's value without actually holding it. The contract has everything from an expiry date of when the contract will be executed to how much and how many units/number of the underlying assets have to be sold.

At expiration the contract holder has the options whether the contract can be executed or not!

Futures

The prime difference between options and futures is that futures need the contract holder to purchase the underlying assets such as commodities or stocks on a respective date in the near future. Futures have several advantages over options in the sense that they are often easier to understand and value, have greater margin use, and are often more liquid. While the underlying maths for futures is complex and difficults to understand. It is enough for you to know that futures are always exercised in the "future"

Perpetual Futures

Unlike traditional futures contracts with a fixed expiry date, perpetual futures contracts do not expire. Instead, they are designed to mimic the underlying asset's price, typically a cryptocurrency like Bitcoin or Ethereum. Here's a idea on how perpetual future's like dy / dx work

The formulas are designed to balance risk by ensuring that traders have enough collateral to back their leveraged positions, while preventing liquidation unless the market moves significantly against them. Margins scale with position size and market volatility to avoid over-leverage and protect both the trader and the platform.

Risk Parameters:

• Initial Margin Fraction (I): The percentage of a position's value that must be held as collateral to open a position. It limits leverage by requiring more collateral as the position size increases.

• Maintenance Margin Fraction (M): The minimum percentage of the position's value that must be maintained to avoid liquidation. It ensures that an account can withstand market fluctuations.

• Incremental Initial Margin Fraction: Increases the initial margin fraction for larger positions. This prevents excessive leverage as position size grows beyond the baseline.

Initial Margin Requirement:

$$\text{Initial Margin} = |S \times P \times I|$$

• The initial margin is proportional to the size of the position and its current value (via (S \times P)) multiplied by the risk of the market (via (I)). The absolute value ensures that margin is required whether the position is long or short.

Maintenance Margin Requirement:

$$\text{Maintenance Margin} = |S \times P \times M|$$

• This defines the minimum collateral required to hold the position and avoid liquidation. Similar to the initial margin but uses the maintenance margin fraction (M), which is generally lower. If the account’s value falls below the maintenance margin requirement, positions may be liquidated to protect against further losses.

Account Value (Equity):

$$\text{Total Account Value} = Q + \sum(S_i \times P_i)$$

• Q: The USDC balance (collateral) in the account.

• $S_i \times P_i$ The value of each open position in the account. Long positions increase account value when prices rise, and short positions increase value when prices fall.

Free Collateral:

$$\text{Free Collateral} = \text{Total Account Value} - \text{Total Initial Margin Requirement}$$

Free collateral is the available equity after accounting for the required margin. It represents how much more leverage the trader can use to open new positions.